Know about investing in share market in Indian from a beginner’s perspective. In this article, we are not going to talk about which stock you should buy but try to explain requirement for trading in stock market.
Several people have this question in mind. How to start investing in the stock market? But coming across an appropriate answer is not easy. However, you can find it here…
Let’s begin with introducing you to the stock market.
A stock market is a place where you can trade in equities and equity derivatives. Equities, aka the equity shares, are each a part of the company, that you as an investor in the company own. They express that you will enjoy a share in the profits of the company and possess equal voting rights. Profits and voting rights are limited to the number of shares you own. Each share unit has a price, a value. E.g. ITC’s current price is Rs. 330 per share. So you can buy 10 shares at Rs. 3300. But don’t expect that you will have any say on how the company is run by purchasing 100 shares as there are crores and crores of shares in the market for ITC. Someone having 100 crores worth of share will also have maybe .02% equity in the company which is not much. This share price is determined on the basis of the company’s performance and also the demand & supply.
Equity derivatives or F&O are contracts, available to trade on the exchange. They do not give you any right or ownership in the company. But they derive their per-unit price from the respective equity share. This is for more advanced trader and if you are just starting I would advise you to stay away from it. The world most renowned investor Warren Buffet calls these Weapons of mass destruction.
In order to start trading/investing in equities or derivatives you need to have a bank account, Demat account and trading account with an exchange registered broker.
Anybody, who is an adult (18 years and above) can start trading in the stock market. However, trading directly via the stock exchange is not allowed. Only exchange registered members can trade in the stock exchange. For non-members, these members act as brokers. Whatever you want to buy or sell, you tell them. They’ll execute the trade on your behalf. For this they charge a brokerage which varies for various broker. You can find the list of major broker in India here.
To keep/hold shares you have purchased, you need a demat account. It’s a simple concept, when you buy something, you get a product. In this case the product is the equity share. Therefore, equity share certificates are given to the trader, which declares the quantity of shares, buy-price and a few more details. The share certificates are now de-materialized, meaning the buyer does not get a physical paper certificate. All the entries on purchase and sale of equity is made into the demat (dematerialized) account. As things progressed, demat account can now be used to enter other securities as well.
Demat account is a kind of storage account. Demat services are provided only by CDSL and NSDL in India. You can read more about demat account in India here.
To buy and sell, you need a trading account with a SEBI registered stock broker. Think of trading a/c as an intermediary between the bank a/c and demat a/c. Funds from the bank a/c goes to the broker, where he executes your desired transactions with the help of your trading a/c and on settlement the shares are stored or taken off (in case of sale) from your demat a/c.
Some of the common question which I receive for Trading and Demat accounts are
What are the Account opening charges for Trading and Demat account? Is there any hidden charges we should be aware off?
Most of the broker will have a nominal account opening charges for trading account but no Annual maintenance charge (AMC). While for Demat, most of broker will have a nominal account opening charge and also AMC associated with Demat account. AMC for Demat can be anywhere from Rs 200 to Rs 500.
So does it mean that I have to have both trading account and Demat account with my broker?
You will need both the account if you are going to take delivery of stock which means if you are going to hold the stock for more than one day. In case you are going to do only intraday trading and not take delivery of stocks you will not need Demat account. Also if you are trading only in F&O, then also you will not need Demat account as you never actually hold equity but just a contract.
Documents required to open accounts
Proof of identity and proof of address is required. A broker also needs details of your bank a/c. So carrying the following documents will be sufficient:
- PAN card
- Driving license or Passport or Voters Id
- a cheque (to make payments and verify your bank details. If you are not making any payments, then carry a cancelled cheque)
- bank passbook (updated account statement of latest few months is required)
A number of photocopies of each document will be required. All the photocopies must be self-attested. Original documents will be required for verification or some broker should be able to do it online for you. This is just a basic list but I will advise you to talk to your broker once for the required document he will need to open an account.
Now, you can purchase equities that are already available in the stock market or freshly issued shares. There is a primary stock market. Here, the companies who wish to get listed on the exchange come to sell their fresh (not traded previously) shares. They make an Initial Public Offer. Interested investors, fill up the IPO form and receive equity shares directly in their demat a/c after a few days. When the company gets listed on the exchange, the shares can be sold or more of it can be acquired. Here we enter the secondary market. The trades that take place as soon as the listing bell rings, occur in the secondary market. The trading a/c plays its role here. We are trading thru the exchange now. In the primary market, we received equities directly from the company.
Coming back to the broker, he offers a wide range of services and not for free.
For providing trading services, the broker levies brokerage (i.e. his commission, his real revenue) and other taxes and fees imposed by SEBI and government (state and central) like STT, transaction charge and SEBI charges. Most of the government charges remain the same but there can be a huge difference in the amount of brokerage charged by each broker. You can get a helping hand to select an appropriate broker, who offers good services and appropriate charges, at IndianShareBroker.com.